INTERNET: NetEase Joins Rush To US, Zynga Crashes Out of China
Bottom line: NetEase’s new California R&D center could become an important hub for its future global growth, while Zynga’s China pull-out reflects the extreme difficulties foreign firms face in the local gaming market.
Just a day after I wrote that online gaming giant Tencent (HKEx: 700) may be planning a major new drive into the US, we’re hearing that its top rival NetEase (Nasdaq: NTES) is also moving into the neighborhood with plans for a new California R&D center. NetEase’s move comes after search leader Baidu (Nasdaq: BIDU) and Tencent both set up US offices last year, though only Baidu actually announced a major new product development center. (previous post) All of these moves represent the Chinese companies’ efforts to tap into the Silicon Valley ethos, which has far more of the skills they will need in their quest to enter global markets outside of China.
While the Chinese firms are rapidly setting up a new colony in California, a parallel retreat is happening across the Pacific as many US firms retreat from the difficult China market. The latest victim in that story is online game operator Zynga (Nasdaq: ZNGA), which has announced it’s shuttering its young China operation to focus on fixing its ailing core US business. Zynga’s retreat follows similar moves by search giants Google (Nasdaq: GOOG) and Yahoo (Nasdaq: YHOO), and also by online recruitment site Monster Worldwide (NYSE: MWW), to name a few.
Let’s begin with the recent flurry of movement to the US, which has already emerged as a major trend this year. Smartphone sensation Xiaomi announced earlier this month it would launch overseas operations to sell some of its non-core products in the US, and a knowledgeable source told me that Tencent is also getting ready for a major launch of an online gaming app specifically targeted at American consumers. (previous post)
Now NetEase has joined the movement with its announcement that it will set up its first R&D center in the west in the San Francisco area community of Redwood Shores. (company announcement) NetEase doesn’t give any details on the size of the investment, but says the new team will work with its core group of 3,600 China-based developers to create games for western audiences. NetEase also revealed it has already adapted one of its popular Chinese titles, Speedy Ninja, for US players and plans to launch the game as its first-ever title in the west this summer.
I have quite a bit of respect for NetEase, which has carved out a nice niche as one of China’s few operators that can actually develop its own popular games rather than just license titles from third-party developers like Activision Blizzard (Nasdaq: ATVI). I have my doubts about whether Speedy Ninja will do very well in the US, but NetEase’s savvy game-developing skills could someday make the California operation into an important new product development center.
Meantime, Zynga, the former high flying game operator that rose to prominence on its earlier close ties with Facebook (Nasdaq: FB), has announced it is formally pulling out of China as it seeks to shore up its core US operations. (English article) The China pull-out was just a footnote in a dismal quarterly earnings report, since Zynga’s operations weren’t especially big outside the US. It said the China closure will result in 71 layoffs at its Beijing studio, and a relatively modest annualized cost savings of $7 million.
Zynga’s China retreat looks a lot like those by Monster and Yahoo, which also abandoned the market to focus on their own struggling core US operations. Google’s withdrawal was slightly different, but also highlighted the difficulties of doing business in the market. Zynga’s retreat does reflect the very real fact that China’s online gaming market is extremely competitive, and only Tencent and NetEase have been able to earn big profits there so far. Following this withdrawal, I doubt we’ll see any major foreign game operators make a serious play at the China market again for at least the next 5 years.
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